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# Chapter 12 - Answers to Questions for Review 1 The five...

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Answers to Questions for Review 1. The five factors include: exclusive control over inputs, government licensing, patents, economies of scale and the networked economy. Economies of scale derive from technological conditions rather than institutional arrangements that can change anytime. 2. Yes if the transportation costs of cement from the next town make the competing cement more expensive than the monopoly price of the local cement. 3. Since the demand curve slopes downward, marginal revenue will always be less than price; because for each additional unit sold one must lower the price for all other goods sold. Therefore, the MR is the price charged the marginal customer minus the revenue lost by charging the lower price to those who would have paid more. 4. On the inelastic portion of the curve, raising price will always increase revenue and (since output will be lower) it also lowers costs. Therefore the firm should always move up the demand curve to where it is not inelastic if profit maximization is a goal. 5. If MR intersects MC from below, then MC must be downward sloping; more output will lower MC. 6. No effect. The same P and Q that maximize also maximize /2 . 7. Price would be 50% higher than marginal cost. (P – MC) /P = 1 – MC/P = 1/3 or MC/P = 1 – 1/3 2/3 or P/MC = 3/2. 8. The price-quantity pair that maximizes profits will also maximize the profits minus a lump sum tax. Such a tax is equivalent to any other fixed cost since it leaves the optimal price-quantity pair unaffected so the question is false. 9. With a perfectly horizontal market demand curve, there will be no deadweight loss. So true. 10. Whoever owns the firm will want to increase profits by reducing x-efficiency. 11. The hurdle model gives the lower price only to those willing to jump the hurdle so the markets are more easily segregated. Deadweight losses are reduced. Answers to Chapter 12 Problems 1. 1) Increase output because MR > MC and P > AVC. 2) Reduce output because MR < MC (we know that MR < P and P = MC here).

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